The BFD | What Makes Them Think They Can Fix Supermarkets?facebooktwitterlinkedin

This government has a terrible record of fixing anything, in fact in most cases they make things demonstrably worse. This makes one wonder just precisely how they think they can fix the supermarket industry.

Let’s look at the track record of NZ governments – present and past. The Resource Management Act was supposed to “fix” resource allocation, but every party in parliament wants RMA reform because it isn’t working. Now we need to fix the fix. The Bradford electricity reforms were supposed to “fix” the electricity market. These are not spectacular reforms delivering what was promised, they aren’t even a bare success.

The Auckland SuperCity reforms amalgamated all the regional councils into a massive behemoth that was promised to deliver savings which haven’t yet materialised and in fact all but disappeared as the monster grows, now employing more people than the combined workforce of the councils it replaced.

How about the Healthy Homes Initiative, the aims of which are laudable, but which have delivered the appalling but entirely predictable ratcheting up of rents? Yeah, that isn’t a success.

Then there is the running joke that is Kiwibuild, touted to fix the building industry and the housing crisis that Labour created while in opposition, but is strangely silent on in government. They declared they’d build 100,000 in ten years, roughly 10,000 a year. We are now into the 5th year of this government and the problem is not just materially worse, but flat out embarrassing as the state housing list grows exponentially, and Kiwibuild has failed to build even the first 10,000 homes promised, in fact barely over 1500 homes so far.

Anyything any government has tried to fix has usually got a whole lot worse. If it was a reform that Labour implemented then it definitely has made things worse, mainly because it has been based on ideology, not reality.

Now we come to the announcement of this government, desperate to be seen to be doing something to alleviate the cost of living crisis, that they will fix the supermarket duopoly…in some way not yet disclosed.

They have stated that the duopoly apparently has $350 million of excess profits over the last two years. Yet not a single media outlet has called out the government on that claim, especially in light of the government effectively destroying any competition in those two years with lockdowns that prevented bakers, butchers, greengrocers and the like from even opening. Not a peep on that incongruity.

Yet somehow, despite a legacy of failure they are expecting us to believe that, this time, they’ll get the reforms right.

Tom Pullar-Strecker isn’t fooled by the bluster either.

Consumers are riled up about food prices, supermarkets are in the dog house, and the Government is under pressure to show it is doing all it can to tackle the rising cost of living.

So there is little downside for the Government in waving a big stick and being seen to be tougher than the Commerce Commission in taking action to improve competition.

Aside from the risk that, like the commission, it could raise expectations too high and then suffer the public’s wrath if it fails to deliver.

There are three cold truths that explain why – even with determination and the best will in the world – delivering change won’t be easy.

Stuff

This is all about the perception: that the government isn’t doing enough about the cost of living crisis. There are three reasons why delivering change won’t be easy.

NZ already has quite a lot of supermarkets.
The impact of wholesale regulation is uncertain.
Forced divestment of stores might help, but is it legal?

Point 1 shows why it is unlikely that any new player will commit to entering the New Zealand market.

Counting only the 377 New World, Pak’n Save and Countdown branded stores, we have 75 large supermarkets per million residents.

The Commerce Commission crunched the numbers slightly differently when it did its market study into the groceries industry last year, but came to essentially the same conclusion in its draft report.

“New Zealand’s overall supermarket density does not appear to be out of line when compared with European countries,” it said.

The significance of this, is that if New Zealand has about the right number of supermarket stores for its size, neither Aldi nor anyone else is likely to rush to the country to build hundreds more.

Stuff

Other countries that we like to compare ourselves with have similar numbers:

Britain has 58 large supermarkets and hypermarkets per million people
France has 81 per million
Germany has 84 per million
The United States has about 80 supermarkets per million residents

There doesn’t seem to be a lot of room to enter the market.

The Government is “determined” to get a wholesale backstop in place by the end of the year, but it will be difficult to design.

Competition advocate Ernie Newman, a former chief executive of what is now the Food and Grocery Council and a key figure in the break-up of Telecom, has described wholesale regulation as only the “fourth best” option for improving competition in the supermarket sector.

Righto, so the government is pegging its hope to an unproven and not likely to succeed strategy of forcing existing chains to open their logistics chain up to their competitors, which will magically result in lower prices? Danger Will Robinson!

If Countdown and Foodstuffs were forced to sell a proportion of their retail stores, or perhaps one or two of their retail chains, to make space for a new entrant then that could be a game-changer.

Wholesale regulation might then make sense as a temporary option to assist a new third operator that was created from existing supermarkets, while it got on its feet.

Stuff

This is the stuff of communist or fascist regimes. Forcing owners to divest their assets to some other entity. But is it even legal?

But the largest obstacle to simply breaking up one or both of the two big supermarket groups may be a legal one.

Countdown and Foodstuffs may be enjoying excess profits as a result of a lack of competition, but that is not a crime, and the same goes for many other businesses in New Zealand.

Countdown has hinted at legal action if the Government does try to break up its business.

Troy Pilkington, a lawyer at its law firm Russell McVeagh, cautioned in October forced divestments could breach common law and the country’s “international treaties”.

The Government’s hand in any legal battle would certainly be weakened by comments made by the chair of its own expert regulator.

Commerce Commission chair Anna Rawlings volunteered in March that such a break-up would be unprecedented internationally and implied it would not be “proportionate” to the competition problems it had found in the industry.

Not even “pretty legal”: more likely it is barely legal. But we have seen this government repeatedly and shamelessly break its own laws. When they are confronted by this they simply change the law or ram new laws through parliament under urgency using their absolute majority to force reforms on voters outside of their mandate.

One thing is for certain, however: this government, which is a shell government, fronted by just a few players and staffed by ignorant fools, will screw it up and make it worse for all.

How’s that ‘but Jacinda saved us all’ feeling working out for you now?